The big news yesterday was that Greece's prime minister said he would call a national vote on an unpopular European plan to rescue that nation's economy. Why wouldn't Greeks want to accept help? Because it means tax increases and drastic cuts in public welfare programs and Greeks have already shown their antipathy to those measures in protests and strikes.

Market's had already discounted the previous good news (that the Greece issue was solved) and yesterday's announcement was unexpected (!), so the markets' reaction was quite violent. Euro plunged, dollar rallied, and metals moved temporarily much lower as well only to regain strength in session's final hours. Actually, metals' and mining stocks' reaction provides us with additional insight as far as next price moves are concerned.

Let's move back to Greece. The obvious point that we would like to stress here is that Greece's prime minister… is a politician. Politicians often use words more "tactically" than "literally" in order to achieve certain goals. What's politicians' common goal in general? Votes. How do you win votes? By doing what people want and not doing what they do not want. Greeks want their officials not to accept help and not to impose any tax increases / decrease public welfare programs. The politicians would love to fulfill voters' wishes, but the problem is that if they do, they will be forced to deal with an even bigger mess and that's certainly not what they want. They want votes - not problems associated with country's bankruptcy.

The only way of avoiding bankruptcy is accepting help, so that's what will eventually take place. Once you realize that, you'll see that the only thing that the Greek politicians can now choose is how will this solution be reached. More importantly, how will voters view it.

If Greece is to accept help, then politicians simply want voters to think that they (politicians) are not the ones to blame. In fact, that's what politicians very often do when they have to make unpopular decisions. "We didn't want to do it!", "they made us do it!", "we are on your side - these other guys are to blame!" all sound too familiar. The point is that we view yesterday's piece of news as one of the ways in which the Greek officials will try to convince their voters that they really don't want to do any tax increases, nor to cut the public welfare spending, but they are forced by someone/something else and they have no choice. It may be a national vote today, and it could be something different tomorrow, but all in all, it seems that it's nothing more than just a temporary vote-gaining disinformation.

Therefore, from the fundamental perspective, we view yesterday's moves in USD, euro, stocks and metals (initial decline) as only temporary.

The technical picture did not much change either even though yesterday's intra-day action was very volatile. Stocks have more or less moved to their early-2010 high (nothing more than a verification of the move above them so far) and the USD Index did not correct more than 61.8% of its October decline. It didn't move above early-Sep highs. What's particularly interesting is that the turnaround took place very close to the cyclical turning point.

The most important thing is that gold and mining stocks (!) managed to move back up even though the influence coming from the USD Index and the general stock market was very negative. Silver erased only a part of its decline, but we believe that signals coming from gold and miners are much more reliable in this case.

USD Index is more or less where it was during the final part of the mid-October consolidation. At that time gold closed close to $1,620 and silver closed below $31. We now have gold approximately $100 higher and silver is $2 higher. This is a clear confirmation of the short-term bullish case on the precious metals market.

In the latest Premium Update we suggested that a consolidation was likely to be seen when metals move just a bit higher and we continue to believe that this was the most probable outcome back then - however, Greece's prime minister's announcement was unexpected and this shock took markets temporarily lower sooner. In a way this is bullish for the precious metals market, as it means that the correction that we mentioned might already be over.

In the summary of the last update we wrote the following:

"The resulting moves to the downside may not be all that significant and we do not recommend opening short positions when the abovementioned targets are reached unless you engage in day-trading."

What we've seen was volatile enough to make momentum players get out of the market and at the same time gold bounced back quickly suggesting that there is strong demand for gold at lower prices. So, with the correction probably behind us, is the precious metals sector still very likely to correct once again when the previously-mentioned targets ($1,780 for gold, $36 for silver) are reached? Not necessarily. At this point, we don't think that when these price levels are reached then one should automatically close their speculative long positions.

How high can precious metals go? It's a bit unclear at this point, but $1,850 for gold and $39 for silver are not out of the question. Of course the situation may change before we get close to these price levels and we will quickly let you know if that is the case, but at this point, these targets appear quite probable.

Summing up, both: long speculative positions (short- and medium-term ones) and long investment (long-term) positions appear justified.

Thank you.

Sincerely,
Przemyslaw Radomski